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Fueled by the decline in oil prices and improvements in the economy, the transportation sector has been on the rise, putting the group in a leadership role. The relative strength of the transports helps build a longer-term bullish argument for the market based on the Dow Theory, but the strengthening group also creates some opportunities at the stock-by-stock level.

A scan of the group finds a number of companies with improving technical picture, but one really stands out as a short-term market outperformer. United Parcel Service (UPS) set the stage for a less-than-bullish second half of the year as they guided The Street’s earnings expectations lower in July. The announcement caused a knee-jerk drop in prices from $92 to $85 as analyst downgraded the stock and their outlooks.

Three months later and the company is once again challenging the same $92 price point, though the fundamentals appear to be lined up for a break higher. Dropping fuel prices should provide a tailwind for the worldwide shipper as they head into the busiest time of the year, the holiday shopping/shipping season. Earnings to be announced on October 25 are expected to see $1.15 per share earned, only $0.02 higher than last quarter thanks to the lowered guidance.

The lowered expectations offer a chance for investors to take advantage of a potential “under-promise/outperform” situation as even the slightest earnings strength will catch the market off guard. Short sellers have loaded up on bearish positions ahead of the end of the quarter as the short interest ratio for UPS is now registering a reading of 2.7 in July to its current reading of 9.1, perfect for a potential short squeeze rally if the stock breaks above $92.

Click to Enlarge The play here appears pretty simple; the stock is breaking to new highs and appears to be set to run towards $100 before year-end on any bullish results. We like the stock as an addition to portfolios as a play on the strength in the transportation sector.

Those that like to leverage a stock with options may want to check out the UPS January $95 calls. A move to the target of $100 would be likely to return profits of more than 100%. Volatility on these options are trading at their lowest levels over the last year, indicating that these options are currently “cheap” for those looking for deals in the options market.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.